Ideally, you’re setting aside a part of your income for retirement. But is that money enough? Not many people factor in inflation—your money isn’t going to be worth as much 10 or 20 years down the road. And what if you live a particularly long life? That’s a good problem to have, but nobody wants to be 90 years old AND broke. Here are some ways to build a retirement fund that includes those factors—so you don’t just live longer, but live better.
Let’s look at history. In the last 30 years inflation has hit as much as 10% a year. Economic meltdowns, like stock market crashes, the bursting of the tech bubble, have all hit everyone hard—especially retirees who are living off their savings and have no additional income to shield themselves from the sharp increase in prices.
So stocks is definitely out of the question. You need something more stable, and increases in value at approximately the same amount as the rate of inflation.
For example, social security is annually increased for inflation, and comes with the guarantee from the federal government to give you monthly income no matter how long you live, and what goes on in the stock market. You work this to this advantage by increasing this fund as much as you can and then delaying benefits as late as you can (though the rule is that you can only wait until you’re 70 years old).
You can also talk to your insurance company about getting an inflation-indexed annuity. It factors in inflation in your benefits. However it is important to get a stable company and shop around for a good deal.
Another option is immediate variable annuity. Its returns depend on the portfolio of stocks and bonds.
Or you could manage the portfolio yourself, and withdraw the money at a relatively safe rate of 4% a year.
You may also want to combine these options, using a portion of your retirement savings to purchase an annuity, and use another portion of your savings for investment. That way your eggs are not all in one basket.
Other retirees also choose to invest in things that will generate income: an apartment they can rent out, or placing a stake in a business where they have profit sharing. However these methods come with their own risk and require maintenance, too.
Note, however, that these options are far better than just putting your money in a regular savings account, which will not beat inflation—and every year, you may end up losing if not the actual cash, but its actual value.
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Good reminder, thanks